Good morning. At this time, I would like to welcome everyone to the IFF First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode until the formal Q&A portion of the call. [Operator Instructions] I would now like to introduce Michael DeVeau, Head of Investor Relations. Mr. DeVeau, you may begin.

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's first quarter conference call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. Please take a minute to review our forward-looking statements. During the call, we'll be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, please refer to our cautionary statement and risk factors contained in our 10-K and press release. Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release. With me on the call today is our CEO, Frank Clyburn; and our Executive Vice President and Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions at the end. With that, I would now like to turn the call over to Frank.

Thanks, Mike. And hello, everyone. We delivered first quarter 2023 results in line or ahead of our expectations amidst a challenging operating environment. Our team successfully navigated soft end market demand and customer inventory destocking as they executed on our priorities to deliver on our financial commitments. We are proud of the results and want to thank the entire IFF team for their contribution. However, year-on-year comparisons in a number of areas showed the backdrop in which we are operating remains challenging as I acknowledged on our last call. As you will see from our quarterly financials, we have made solid progress on our objectives of reducing costs to improve efficiency, recovering inflation and materially reducing our inventories while improving our service levels to our customers. The key challenge remains volume growth and our management team remains keenly focused on accelerating profitable sales growth moving forward. Before I get into our first quarter performance, I do want to share an update on our search for our Nourish President. Over the past several months, we have engaged with various leaders about the opportunity to run our largest division. At this time, our search continues as we are looking to attract a well-regarded leader with a strong track record of success that can drive performance in this division. I am pleased with the slate of candidates that we have and look forward to welcoming a new leader in due course. We will provide further updates going forward as we progress the process. Starting on slide 6, I'd like to begin with a high level look at our performance in the quarter before handing it over to Glenn to discuss our financials and full year outlook in more detail. In quarter one, IFF generated $3 billion in sales, which reflects 1% comparable currency…

Thank you, Frank, and thanks to everyone for joining us today. Turning now to slide 9, let me review our first quarter performance across each of our four business segments. In Nourish, sales were flat on a comparable currency neutral basis with growth in Food Design and Flavors, all set by continued volume declines in ingredients. As Frank shared, Nourish ingredients, which includes protein solutions, emulsifiers and sweeteners, core texturants and cellulosics and food protection had the most pronounced volume declines in the quarter representing approximately 60% of our total company volume decline. Despite our pricing actions and productivity initiatives in the quarter, within our Nourish segment, the lower volumes and the unfavorable manufacturing absorption due to our inventory reduction program that I mentioned earlier, more than offset those efforts, contributing to a 27% year -⁠over -⁠year decrease in currency ⁠neutral adjusted operating EBITDA at $208 million. Those same pressures impacted Health and Biosciences this quarter, with a 3% year -⁠over -⁠year decrease in comparable currency ⁠neutral sales and a 19% year -⁠over -⁠year decrease in comparable currency ⁠neutral adjusted operating EBITDA, despite price increases and strong productivity gains. While we saw solid growth in Cultures and Food Enzymes and Home and Personal care, lower volumes and unfavorable manufacturing absorption also pressured our performance. As Frank mentioned earlier, our Scent division continues to perform quite well, delivering an 8% increase in comparable currency ⁠neutral sales and a 1% increase in comparable currency ⁠neutral adjusted operating EBITDA, driven by double ⁠digit growth in Fine Fragrance and Consumer Fragrance. Scent’s growth this quarter was driven by higher volumes, pricing, and productivity gains, as the division has remained resilient. Lastly, I'm pleased to share the Pharma Solution has delivered a 4% increase in comparable currency neutral sales, led by continued growth in core…

Thank you, Glenn. Moving to slide 13, I would like to summarize our current position. In line first quarter results and reiterate where we are headed for the remainder of 2023. Over the years, IFF has remained resilient amid a variety of market conditions while successfully transforming the business to meet evolving customer needs. The same is true today as we focus on controlling what we can control and executing on the operational priorities outlined in our strategic refresh in order to achieve our financial vision and drive sustainable, profitable growth that benefits all of our stakeholders. We continue to believe our volume will improve, yet acknowledge that market conditions remain uncertain. As Glenn mentioned earlier, a majority of our customers have signaled that they expect destocking efforts will end and believe the consumer will remain resilient in the second half. We will continue to take action to stay nimble. Strengthen our financial and operational foundation and maintain our resilience as we continue to be diligently focused on delivering our operational and financial objectives. Moving forward, we remain committed to bringing strong products and innovation to our customers as we meet or exceed their service expectations. Financially, we are focused on improving our working capital positioned by rapidly reducing inventory levels to increase cash flow generation and we will continue to execute on our growth focused strategy by enhancing productivity, driving operational efficiencies and prioritizing our highest return businesses, all while maintaining capital discipline. We have started the year in line with our objectives and are confident in our ability to continue to execute going forward. Once again, I want to thank our teams for their tireless work to innovate and bring to market the essential products and solutions that shape so many of our daily experiences. And I have no doubt that we are well on track to build a more efficient, agile and customer centric organization poised to deliver sustainable, profitable growth in any market environment. With that, I would like to now open the call for questions.

[Operator Instructions] Our first question comes from the line of Heidi Vesterinen with BNP Paribas.

Good morning. So I wondered if you could please talk more about the cadence of volume and margin performance to the quarters to get your guidance, please, and specifically on volume. So you reported Q1 volumes down high single digits, which I think is what you had guided for originally, but then in your speech, you said that it was better than expected. And then you're now saying, I think Q2 is looking somewhat worse than expected, and I think your guidance used to be down low single digits. So can you clarify what the guidance for Q2, please? Perhaps if you can also comment by segment and then same for margins through the year, please. Thank you.

Hi, Heidi. It's Frank. A couple of things. So in Q1, we had guided to your point high single digits volume decline, and we actually performed a little bit better than what we had assumed in that original guidance, sales were up 1%, as you know, on a currency neutral basis. So a little bit of ahead in Q1. Q2 is slight down from what we had assumed originally. However, when we take a step back, Heidi, think about the first half of the year, mid-single digit volume decline, which is pretty much right on what we had expected at the beginning of the year. So really what you're seeing is a phasing and shift for the first half of the year, mid-single digit decline in volume. And we'll talk a little bit more about some of the different areas here in just a bit. The second half of the year, what we are anticipating and assuming is obviously against a much easier comp as we get to the back half of the year. We are making the assumption that we will have mid-single digit growth in the second half of the year, which then, when you look at the full year, has our volume being flat year-over-year. So let me unpack a little bit about some of the key assumptions as we get into the back half of the year and even into the second quarter. First, destocking, we are assuming that ends pretty much in Q2. So if you think about destocking, Heidi, we saw this really come to fruition in Q4, the volumes were down high single digits of Q4 of ‘22. We continue to see destocking in Q1 and some destocking is continuing in Q2. But we think destocking at the end as we head into…

Our next question comes from the line of Mark Astrachan with Stifel.

Yes, thanks. And good morning, everyone. I wanted to ask about guidance and then some of the troubled areas within the business. So in your opinion, are you being more conservative or optimistic than you were previously? It seems like underlying assumptions, maybe from a consumer dynamic, has changed to be more positive within the underlying guidance. I'm curious if you could comment on that. And then for the more challenged portions of the portfolio, things like the legacy and [inaudible] and ingredients. In terms of what you highlighted, what proactive steps are you taking to offset what seems like perhaps more permanent and structural volumetric share loss? Meaning like improving service levels doesn't seem like it could be enough to change the trajectory of the business, but perhaps I'm wrong. So sort of curious how you're thinking about what you can do to improve those pieces of the business which have been dragging performance and losing share. Thanks.

Yes. Mark, it’s Frank, a couple of things. One is with regards to the businesses that were challenged, and some of these as we have highlighted clearly were due to what we see more destocking and end market demand and not necessarily share loss. But I will also acknowledge there has been share loss in other parts of our business. So for instance in health, Mark, you highlighted, we have discussed that the probiotic market in North America several times. In that business in particular, we have been really focused on our resources into that marketplace. That is really the down in volume has been driven much more by destocking and end market softness. But with that said, we have a strong focus with our health team. There's a lot of reviews with our commercial team, and we are starting to see sequential improvement in that business, Mark, as we go forward. In our Ingredients business, as I just highlighted, there's a couple of things that we are put in place. One, our customer service levels were not where they needed to be. We highlighted that during our Investor Day. They have improved significantly, Mark. So that is a big, I would say, plus for us, and we're getting good positive feedback from customers. So customer service levels in the on time performance range of 90% to 95% is really important, and we're there. Second, we now have the capacity that we need to supply customers. We had run into capacity challenges in the past, so we now have the supply that we need. Third, we are putting targeted resources in specific markets that are going to be focused on commercial customers around ingredients. So additional resources Mark, to your point are also a part of what we are doing. And then, four, what has been encouraging, we had gotten away from really good pipeline development with our customers in that space. And I can tell you this is going to take some time, but we are seeing good projects now come to fruition, and we are seeing pipeline progress in nourish and in ingredients since specifically. So those are the areas of focus. The team is spending a lot of time really looking at how we can accelerate our sales performance in those areas.

Our next question comes from the line of Gunther Zechmann with Bernstein.

Hi, thank you. Hi, Frank. Hi, Glenn. Can you please provide your insights into the cash flow progression, the cadence throughout the year and the $1 billion free cash flow, adjusted free cash flow target? And also within that, could you just discuss and outline what you've embedded in terms of working capital improvement, please?

Good afternoon, Gunther. Thanks for the question. I think the summarized version is we're actually tracking quite well against our objectives. And I'll sort of unpack, as you know, the two big contributors relative to our adjusted free cash flow combination of achieving our earnings guidance and then secondarily all the work on working capital. We had a very good quarter relative to our expectations around working capital. As a reminder, our full year objectives for working capital are consisted of a $200 million point on point, yearend reduction in inventory and then $100 million increase between payables and receivables for a net $100 million reduction in net working capital. The biggest driver of that, obviously, is inventory at that $200 million, that $200 million reduction is actually a $350 million volume reduction with $160 million of basically price escalation, i.e. raw material cost increases coming through. In the first quarter, focusing on inventory, we actually were over $200 million down inclusive of around $80 million of price escalation. So the volume component in the first quarter was $280 million against our full year objective of $350 million. So we're trending quite well. We will probably actually get to the full sort of, our initial level of inventory reduction by the end of the second quarter at this point in time. Payables and receivables, they're a little lumpy seasonally. We're feeling very good about achieving those objectives at the end of the year. So overall we feel very good, particularly relative to the working capital improvements.

Our next question comes from the line of John Roberts with Credit Suisse.

Thank you. How do you explain what appears to be underlying consumer strength in fragrances versus the underlying consumer weakness in food, ingredients? Or maybe the question should be how did the channels get so overstocked in food, ingredients and not so overstocked in fragrance consumer products? And are there significant divergences in the current point of sale volumes between packaged food and fragrance products?

Yes. Hi, John. This is Frank. What we have seen in consumer fragrances, in particular, we saw a very strong Q1. In fact, we also saw a very strong Q1 in fine fragrances as well. So we feel really good about what we're seeing. I think consumer fragrances, it was a lot of, I would say pent-up demand. I think you are seeing clearly some positive trends on what we have been working with our customers, in particular, bringing new innovation to consumer fragrances. We've worked with lot of the large consumer packaged goods companies over the last several years and I think this is where we really have brought strong innovation in our consumer business. So we feel really good about that. There clearly was an inventory build significantly in ingredients as we've highlighted. You could see it as you go through the first part of ‘22 and then you look all the way back to ‘21. I think that what took place in those businesses in particular, uncertainty around supply chains and companies wanting to make sure that they had the supply necessary as you went through a lot of volatility in the supply chains, which is what caused the build. And obviously now what we're seeing is some of the destocking from those efforts in those businesses.

Our next question comes from the line of Joshua Spector with UBS.

Yes. Good morning. This is Lucas Beaumont on for Josh. So just wanted to focus on the production cost under absorption. Could you please tell us sort of what was the actual size of the impact there in 1Q? Look like maybe $150 million or so in the EBITDA bridge. And then looking at 2Q in the second half, how much residual impact are you assuming in each period as the year progresses? And finally, if we get a scenario where volumes kind of disappoint to the downside, would that get larger? Thanks.

Yes. Hey. Thanks for the question. This is Glenn. Within the first quarter, the negative absorption impact was $100 million, which translates actually into 330 basis points of impact on EBITDA margin. That represented a year-over-year volume decline of about 20%. So think about our annual fixed cost base for our manufacturing base of about $2 billion. Every one point on an annualized basis is basically worth about $20 million. So hence why we're able to reduce our inventory so significantly, we took production down significantly, so I'll say a onetime event of $100 million. We are expecting, as I mentioned, to continue to make progress on reducing inventories and expecting to have mid-single digit down volume in the second quarter. That translates into another $50 million of negative absorption. We are anticipating actually positive absorption in the second half of the year as Frank mentioned. We're expecting mid-single digit growth in the second half of the year. So production volumes being up year-over-year. Again, the context of the risk associated or opportunity associated with declines or increases in manufacturing, one point on a full year basis is equal to $20 million of negative absorption. So if you think about two points in the second half, that would be the equivalency of that $20 million. We have discussed in the past. We will have to continue to consider that if we continue to see volume softer than our expectations, what will be the balance of continuing to manage cash flow and keep our inventories in the right place for production efficiency purposes versus basically the earnings profile. So they're clearly in a softer environment than anticipated. There is some risk of further negative absorption in the second half of the year. Thanks for the question.

Our next question comes from the line of Ghansham Panjabi with Baird.

Hi, everyone. Good morning. Yes, just judging by some of the comments from your major customers out of this earnings season, it clearly looks like the global consumer is a little bit weaker. Just curious, given inflation has peaked and just your more recent conversations with your customers, do you get a sense as to whether some of the promotional activity that your customers typically resort to during periods of weakness, are they starting to contemplate that? Just trying to get a sense as to the risk profile as we cycle through the rest of the year because you will be passed these talking, but we still have a weaker consumer. Thanks.

Yes, hi. This is Frank. I think as we talk to our customers, at least the big consumer good companies, I would say they're probably cautiously optimistic on the resiliency of the consumer. They are stepping up in certain categories, promotional activities and efforts. We have clearly seen a lot of, I would say good focus from them on innovation and looking for new projects as they continue to focus on building out their future offerings to consumers. I also think that what is taking place is if you look at from our lens and it goes back to what I was highlighting, we do anticipate that sequential improvement will continue from a volume perspective. So just to reiterate a couple of points in particular in the areas that are really key for us, the sequential lift going from first half down mid-single digits to positive mid-single digits in the second half. We do continue to see working with our customers very clear opportunities for that sequential step up, especially against a softer back comparison quarter in the back half. So we believe that our consumer companies that we're working closely with are the ones that are highlighting differentiation and innovation has been key. And that's something that we will continue to focus and work on as a company.

Our next question comes from the line of Andrew Keches with Barclays.

Yes, hi. Good morning. Glenn, I was hoping to get a little more context for your deleveraging plans over the next well, this year and next. So you came into this year a little over 4x on the net basis that figure has gone up, again as expected, you do have those divestitures announced which will help you get leverage back down, it looks like to about where you came into the year, but I think it still looks like we're going to end the year around flat in 2023 from a leverage standpoint. So I guess that leaves you with a lot of wood to chop next year to get down to that 3.0x target. So I guess the question is do you expect to get there organically or at this point do you actually need those additional portfolio actions to drive the accelerated deleveraging and actually get you there next year? And then related to that, it's not lost to me that your dividend is really absorbing all your cash flow at this point. So to the extent that conditions do deteriorate from here or you can't optimize the portfolio further, are you open to considering a dividend reduction or cut at some point to preserve the investment grade status?

Hey Andrew, this is Glenn, thanks for the question. Agree relative to wood chopping, that's why I have a hatchet with me today. But relative to your assumption for this year, you're correct. We were a little over 4x at the beginning of the year. We will be receiving net proceeds after tax distributions transaction over $750 million, combination of this quarter and next quarter related to the sales saving solutions and FSI which will all go to debt pay down relative to getting to the 3x times or less by the end of next year. We are fully committed to that. That will be achieved through a combination of three elements. One, we continue to have opportunity to improve our working capital position. We expect to continue to make progress next year from this year. Secondarily, we do expect the earnings trajectory will improve significantly next year. Part of it is overlapping some significant items, such as $100 million of negative absorption and then getting the top line going with our productivity program. So that's the second thing either denominator improving, but that all being said, divestitures clearly play a role in getting to that less than 3x. We have been very active reviewing the portfolio. We are proceeding on multiple fronts. We are fully confident that we have an attractive set of assets that actually aren't ideal fits for our portfolio. We are past the two year anniversary of the Reverse Morris Trust considerations as of February this year of note, and we are proceeding quite well on that path. So I'd say our confidence remains high and commitment remains high to get to less than 3x. And regarding cutting the dividend, that is not on the table at all.

Our next question comes from the line of Christopher Parkinson with Mizuho.

Thank you. You adjusted your revenue guidance a little bit. You're citing some energy and raw movements. Just can you remind us of just how much of your portfolio passes through? And just as a corollary of that, can you also just give us a real quick update on price cost movements, yes, for the balance of ‘23 and just what portion of your portfolio you believe will reign resilient in terms of pricing? Thank you.

Yes. Hey, Chris. It's Glenn again. Relative to energy, as a reminder, in our original guidance, at the beginning of the year, we had 6% gross pricing in the P&L. 30% of that, or a little less than two points, was associated with energy. About 75% of our energy prices are either directly via index or indirectly via aligned surcharge attached to energy pass-through to customers, and they are generally reviewed on a quarterly basis. We expect that as we mentioned, we're taking a point out of that just because there's been a very significant decline in energy prices globally. We believe that that will be relatively net neutral this year, in part not only because the pass-through, but secondary timing. The majority of our energy prices actually sit in inventory because they're part of production cost. So with 140 days of inventory, they sort of match by the end of the year. There should be some overlap as we roll into next year, but for this year, we're assuming that the energy net is sort of neutral from a P&L standpoint. In general, we are seeing positive deflationary trends not only in energy, but in logistics as well as in certain raw materials. So that is favorable relative to the portfolio, as we mentioned in the past, we believe that is a potential upside. It would be either late this year because generally the rolls obviously run through inventories, but could be meaningful next year. And relative to our portfolio, we would say that roughly 60 to two thirds of our portfolio have some degree of resiliency, i.e. less commoditized, more uniqueness relative to characteristic. But I would caution we're in the early days of deflation. So I think it's a little early to declare sort of significant margin capture relative to improvements in raw material and other costs as well. Thanks for the question.

Our next question comes from the line of Lauren Lieberman with Barclays.

Great. Thanks. Good morning. In the prepared remarks, you guys commented on pricing, particularly in Nourish as a revisiting of pricing strategy. So I was just kind of curious if we could talk a little bit more about that kind of where you think there are areas to adjust what you kind of meant by that. And then a corollary would be just a discussion on Nourish margins over time. Kind of been in that like, 12% range over the past two quarters. And I was just curious how you're thinking about Nourish profitability, perhaps looking further out and also, again, notice adjustment in pricing strategy. Thanks.

Yes. Hey, Lauren, it's Frank. On the pricing strategy, we are working with customers to balance price volume opportunities. So clearly this is not across the board, but very surgical, Lauren, in our practices, in particular, in certain geographies and I would highlight in great areas of China and certain markets where there is more price sensitivity. We are looking at price volume, but not across the board. So very surgical approach to pricing. Margins will improve, Lauren, over this year and over time. Remember that Nourish based on the first quarter, a lot of the manufacturing absorption impacted the Nourish division in Q1. There'll be some impact, as we've highlighted in Q2. And then things will improve in the back half for Nourish and for the company.

Our next question comes from the line of Matthew DeYoe with Bank of America.

Good morning, everyone. Frank, can you talk a little bit about the enzymes business? I know it's a big consumer of energy and footprint is pretty European based. So the gas price in Europe, with that coming off a lot, is that an area where energy will be given back in price? Do you think you can hold on to it there? And I guess, given all the volatility on the cost center, where are margins now for enzymes versus maybe where they were in 2021? And where do you think they may be by the end of the year?

Yes, I'll have to take a look back in ‘21. But let me give you the enzyme business and take a step back. One, we think this is a really important business for us, and we're seeing great innovation in our enzyme business. As I highlighted, we saw really good growth in home and personal care. We continue to see really good growth from our food and cultural enzymes. And we're seeing encouraging now trends as destocking improves in our probiotic business. Grain processing, animal nutrition is still somewhat challenged, but we are working very diligently on those businesses. From a margin perspective, I'll take a, look, remember that as we look at 2021, our overall margins were obviously, I think, better in ‘21. We did see obviously decline based off of what has happened from inflation. So clearly that has impacted us in 2022. Manufacturing absorption also impacted us as we hit the fourth quarter of last year and the first quarter of this year. But over time, we're really confident in the margin progression and improvement in the health and biosciences business as we go forward.

Our next question comes from the line of Silica Cook with JPMorgan.

Hi, good morning. There's like $52 million in severance charges you recorded this quarter. Is that roughly like 500 people that are supposed to leave? And can you tell how many have left so far and how many are to leave? And I have a follow up on volumes. If you volumes split out mid-single digits for the quarter, does that mean that we're down high single digits in nutrition and in health and bio? Thank you.

Hey Sopha, this is Glenn. We are expecting charges of roughly $75 million full year for the cost reduction program. That will be an annualized impact of about $100 million. We expect kind of around $72 million to hit the P&L this year. For obvious reasons, I'm not going to describe sort of the pace at which exits in the organization are happening from the standpoint. So that covers that. Can you remind me the second question again?

I was wondering whether your volume headwinds were like in the high single digits -- were down . I was wondering whether volumes were in high single digits in both nourish and, in your healthcare, and bio segment.

Yes. As we had mention, the softish part of our business from a volume standpoint was in Nourish. But more specifically that really was in the ingredients portfolio, which is roughly $3 billion of Nourish on an annualized basis. So that's where it was concentrated for flavors and food designs generally were fine. Thank you. There are no further questions. I would like to turn the call back over to Frank Clyburn for closing remarks.

Thank you everyone and appreciate the time today for our first quarter earnings call. And we look forward to future updates and continuing our transformation. And our overall path to a very strong, profitable, growth profile company and helping consumers around the world. Look forward to speaking to you soon.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.